By Giulio Piovaccari and Sudip Kar-Gupta
MILAN/PARIS (Reuters) - Fiat Chrysler (MI:FCHA) and Peugeot owner PSA (PA:PEUP) are in talks over a potential tie-up that could create a $50 billion giant better placed to tackle a host of costly technological and regulatory challenges facing the global auto industry.
The two groups said in separate statements on Wednesday they were holding discussions aimed at creating one of the world's leading auto makers, after a source familiar with the matter said on Tuesday talks were taking place.
After ditching a proposed merger with Renault (PA:RENA) in June, Fiat Chrysler (FCA) Chairman John Elkann confirmed the group's bid to pursue an alternative alliance as car makers face huge investments for electrification, emission reduction and autonomous driving technologies.
Milan-listed shares in Fiat Chrysler opened up more the 10% on Wednesday, after ending up more than 7.5% on Tuesday in New York. Peugeot share rose more than 6% to hit their highest in more than 11 years.
Yet if a combination of Peugeot and FCA succeeds in overcoming political, financial and governance hurdles, the new enterprise would still face substantial challenges.
Global automakers face the prospect of a slowdown in demand coinciding with the most dramatic technology changes in a century.
Morningstar senior equity analyst Richard Hilgert said in a note that total volumes of FCA and Peugeot, including China joint venture partners, amounted to 8.7 million vehicles last year, ranking the eventual combined group fourth behind Volkswagen (DE:VOWG_p), Toyota (T:7203) and the Renault/Nissan Alliance (T:7201), each at more than 10 million units.
"We view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption from electrified powertrain as well as autonomous technologies," Hilgert said.
MORE ADVANTAGES
Investors have speculated for several years that Fiat Chrysler - itself the product of an Italian-U.S. merger - was hunting for a further partner, encouraged by the rhetoric of the company's late chief executive Sergio Marchionne.
FCA, controlled by Exor (MI:EXOR), the holding company of Italy's Agnelli family, had discussed a combination with Peugeot earlier this year, before it proposed a $35 billion merger with Renault.
At that time, FCA said a deal with Renault offered more advantages than a combination with Peugeot, but Elkann, a scion of the Agnelli family, broke off talks after French government officials intervened and pushed for Renault first to resolve tensions with its Japanese partner Nissan.
Paris has a 12% stake in PSA through state bank BPI, while the Peugeot family and the Chinese government each have a similar holding.
The Chinese presence might trigger doubts in the United States over a potential merger, as trade tensions between Washington and Beijing remain high.
Max Warburton, an analyst at Bernstein, said the combination of FCA and Peugeot had more logic and greater chance of success than the previously attempted FCA-Renault deal, but said PSA offered little synergies in the United States, Latin America and China. "The focus will be Europe," he said.
PSA's supervisory board is due to meet on Wednesday to discuss the potential deal, two sources close to the matter said. FCA said in its statement it had nothing more to add for the time being.
